Rot continued in the global seaborne iron ore market with price plummeting by USD 2 per tonne yesterday. Spot iron ore is trading at less than USD 76 per tonne, a fresh five year low and whopping 45% to 55% slump in last 12 months for different type/grades/origin

Iron ore for May delivery on the Dalian Commodity Exchange was down by 2.1% at CNY 506 per tonne and on the Singapore Exchange, the December iron ore contract fell 1.1% to USD 74.70 a tonne.

Despite production cut by several large steel mills, low levels of steel prices in China coupled with cheap stocks at Chinese ports is putting severe pressure on Chinese steel mills as well as iron ore traders, who are already facing serious liquidity crisis

Steel Production - According to China Iron and Steel Association, the large steel producers in China have cut output for the most part of October, due to sluggish domestic demand and government directives to curb pollution ahead of APEC meeting this week and they produced 1.631 million tonnes of crude steel a day on average during last 10 days of October.

Steel Prices – The free fall in domestic steel prices seems to be on hold for some time with WoW gains in scrap, billets and long products at Shanghai although flat products continued weakening in last 7 days

Port Inventories - According to SteelHome, the stocks of imported iron ore at China's ports were 106.3 million tonnes last week up by 23% YoY. It is understood that 60% of stocks are owned by traders and 40% by steel mills. It would be interesting to see if the historic seasonal pattern of ahead of winter in the Northern China would support prices as year comes to an end

Liquidity Crisis - Iron ore financing in China also poses a big price risk and liquidity conditions in the industry are worse than in 2013. Iron ore financing is snowballing into a bigger problem, as steel mills roll over multiple letters of credit to pay for old ones and are forced to sell in the spot market to raise cash, which in turn puts more downward pressure on iron ore. It is understood that market players with good track record need to deposit 20% to 30% with banks for LC opening while the figure is as high as 70% for firms with poor credit record

The above factors have caused historical low iron ore levels which don’t seem to be ending soon although some analysts forecast a rally in the final weeks of this year as mills restock and some high cost mines close. Experts in fact believe that iron ore price levels are likely to drop to USD 70 per tonne by year end on over supply. Morgan Stanley said this week that private iron ore traders in China expect oversupply will drive spot iron ore down further, to USD 70 per tonne by the end of the year, and there is little upside to demand out of China.